The New FINRA Inspections Pilot Program
The impact of technology on the financial sector has been transformative, revolutionizing the way organizations operate and conduct business. The recent pandemic accelerated these changes, prompting regulators like FINRA to re-evaluate traditional practices. FINRA is launching a new voluntary, three-year pilot program allowing eligible member firms to conduct remote branch inspections of their branch offices and non-branch locations. This initiative is designed to capitalize on advancements in technology and adapt to the shifting work environment induced by the COVID-19 pandemic.
Genesis of the Proposed Rule Change
Under the current FINRA Rule 3110(c)(1), member firms are required to conduct on-site inspections of their branch and non-branch locations on a designated frequency.
FINRA’s proposed rule change is to adopt a voluntary, three-year pilot program. This program would enable eligible member firms to fulfill their inspection obligations by conducting remote inspections of eligible Offices of Supervisory Jurisdiction (OSJs), branch offices, and non-branch locations. Participating member firms are expected to adhere to certain safeguards and limitations to mitigate potential risks associated with remote inspections.
What Will Change
Length of the Pilot Program. Member firms would be able to conduct the required inspections remotely, subject to certain safeguards and limitations. The pilot program would automatically conclude three years after its effective date.
Member Firm-Level Requirements. Member firms must conduct a careful analysis to determine whether both the firm and office locations are eligible to have remote inspections. The proposed rule change includes specific criteria to determine eligibility and sets out conditions that participating firms will need to adhere to during the program.
Not All Firms May Participate in the Program. To be eligible to participate in the program, firms may not have certain disciplinary or financial conditions in their background. For example, if they are designated as a Restricted Firm under FINRA Rule 4111 or as a Taping Firm under FINRA Rule 3170. Other considerations include whether the firm is experiencing financial and/or operational difficulties.
Member Firm-Level Conditions. Firms participating in the program need to demonstrate they have clear policies and procedures, including a recordkeeping system that ensures prompt access to the records required to be maintained by applicable securities laws and regulations.
Firms must also review existing surveillance and technology tools to ensure they are appropriately designed to supervise the risks presented by each remotely supervised location.
Location-Level Requirements. The proposed rule change also outlines criteria to determine the eligibility of a specific location for remote inspection, as well as conditions that a location must satisfy to be eligible for remote inspection.
Location-Level Ineligibility Criteria. Sites with affiliated individuals who are under heightened supervisory plans, involved in proprietary trading, or manage customer funds or securities are not qualified to participate in the remote inspection program. Simply put, if the location is tied to these activities or individuals, it cannot be included in the remote inspection program.
Location-Level Conditions. There are specific conditions that a location must satisfy to be eligible for remote inspection. These conditions revolve around electronic communications, the supervision of correspondence and communications, and recordkeeping.
The Risk Assessment Requirement. Participation in the program requires a firm to conduct a thorough and detailed risk assessment for that location. This risk assessment should take into account any higher-risk activities or higher-risk associated persons at the location.
Implications of Participating in the Pilot Program
It is crucial for firms to understand the requirements of the program and assess their ability to meet these requirements before opting in. For instance, firms must be able to collect and submit the required data and information to FINRA in a timely manner. Failure to comply with the requirements could result in a firm becoming ineligible to participate in the pilot program.
By embracing technology and redefining traditional practices, regulatory bodies like FINRA are paving the way for a more flexible and resilient financial sector. However, as the proposed rule change undergoes further review and potential implementation, member firms should remain vigilant, understanding the implications and responsibilities associated with participating in the pilot program.
As the proposed rule change undergoes further review and potential implementation, member firms should remain vigilant, understanding the implications and responsibilities associated with participating in the pilot program.
Compliance Reviews and Assessments
Oyster Consulting provides expert compliance support to assist firms in determining whether the firm and specific locations are eligible to participate in the program. Our detailed and documented analysis of your compliance program and technology will help ensure your firm remains compliant and able to participate in the program.
Oyster Solutions compliance management software includes a tailored risk assessment that identifies, assesses and prioritizes your firm’s unique risks.